By Harvey McIntyre
You may have to think about this, because its contrary to your present ideas about managing money.
Youve heard homilies like… 'save 10% of your income… maximize your contribution to ira (US) or rrsp (Canada)… pay off high interest rate or biggest debts first… make room in your budget for regular investing… etc.' Its the only kind of information youve had and its the basis of your ideas about how you should manage your finances. Unfortunately, its virtually all product info. They want you to use their products– loans, savings accounts, ira or rrsp, mutual funds, etc. in your daily financial management.
We need information about procedures, not products, but dont expect it from your favorite financial planner or advisor. Proper use of their products can make a dramatic change in your finances, but it reduces their profits!
'Financial planning' is the generally accepted methodology of personal financial management. Its information for managing wealth, and it simply cant work for creating it– the result of everyday financial activities. Basing decisions on financial planning concepts is the reason for most personal financial problems. Worse, government statistics show extremely high odds against even a low measure of financial success at retirement; odds that have not improved since records have been kept, in spite of higher incomes, better education, pensions and government safety nets, and the combined advice of hundreds of thousands of financial planners and advisors.
The reason: financial planning is based on budgeting your pay. This means you ignore your earnings. Its the only time in all financial accounting that ignoring income is a 'generally accepted' procedure.
The result is financial problems– some you dont even know you have! Replacing your present concepts with new Wealth Creation financial management can put hundreds of extra dollars a month in your pocket, tax free. And thats only the start! People like you are making remarkable changes in their financial lives by changing their ideas about personal financial management.
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To set the stage, imagine there is no income tax. You are paid what you earn, so if you earn $1,000 thats the amount of your pay check. If you want a widget that costs $100, theres no income tax, so $100 is what you earn to pay for it.
Dream over! What you earn is not what youre paid, because income tax is either deducted from pay, or you set aside money to pay it. If your overall tax rate is 25% and you have other deductions of $100, when you earn $1,000 your paycheck stub will show: Earnings: $1,000 Income tax: $250 Other deductions $100 Paycheck: $650
Call this an income stream and go a step further. All deductions other than income tax are really part of your budget, withheld as a requirement or convenience by your employer. So your main income stream is:
Earnings: $1,000 >> less $250 tax >> $750 to budget.
What does this have to do with the cost of a widget? The price of your widget is what the vendor gets– $100. But its cost is the amount you had to earn to have $100 to pay for the widget, and the time you put in earning it!
As for tax, the next dollar you earn will be taxed at your top tax rate, as will income used for the next dollar you spend. Check your tax return to see the tax bracket youre in. Your top tax rate is the rate in that bracket and its always your 'effective' tax rate. For the average person its about 40%.
At an effective tax rate of 40%, the cost of your $100 widget is
$167 income >> less $67 income tax >> $100 for widget.
If earnings average $20/hr, the widget costs over 3 hours at work!
Now we can attack the problem. If you have to earn $1.67 to pay for a $1.00 item, your 'tax factor' is 1.67. Multiply the amount involved in your next financial decision by your tax factor to see the income streams involved. You should do this with every financial decision, but use it first to take your first easy step towards maximizing savings ability (sa).
Tighten up your 'shopping attitude'. For example when you know the time youll have to put in at work to buy your widget, youll think about whether you really want it. If you still do, buy it– thats what your money is for. But if you dont buy it, at least for now, youll have more money for things you really want. Do this with every expense, even that extra cup of coffee. The little ones really add up!
Reducing impulse buying is not penny pinching, it gives you more pennies to pinch! Everyone is an impulse buyer to some extent: your new shopping attitude should increase sa by $100 to $500 a month or more. Could you use an extra tax-free $100 a month?
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Discover Wealth Creation at www.gettingaheadfinancially.com
Harvey L McIntyre is retired after a thirty year career as a financial advisor. When Registered Retirement Savings (rrsp)plans were first introduced in Canada they provided the clue to discovering a monumental error made when income tax was first introduced throughout the free world. After twenty years of validation by over 400 clients, Wealth Creation is now available to change the financial lives of those who adopt it.
Tags: Eliminate Debt, Present Income
